Page 118 - Microsoft Word - 00 Prelims.docx

Chapter 5

The algebraic approach

Economic theory states that the monopolist maximises profit when
Marginal cost = Marginal revenue.

Illustration 1

Marginal revenue is the additional revenue from selling one extra unit, for
example:

Quantity Price Revenue Marginal revenue

1 $70 $70 $70
2 $60 $120 $50

3 $50 $150 $30

4 $40 $160 $10
5 $30 $150 $(10)

Marginal cost is the cost from making one more unit. It is usually just the
variable cost, e.g. MC = $30. (see illustration next page)

112